Filed 4/29/16 East Coast Foods v. Kelly, Lowry & Kelley CA2/3
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(a). This opinion has not been certified for
publication or ordered published for purposes of rule 8.1115(a).
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION THREE
EAST COAST FOODS, INC., ET AL., B262679
Plaintiffs and Appellants, Los Angeles County
Super. Ct. No. BC499211
v.
KELLY, LOWRY & KELLEY, LLP,
ET AL.,
Defendants and Respondents.
APPEAL from a judgment of the Superior Court of Los Angeles County,
Barbara M. Scheper, Judge. Affirmed.
Rostam Law, Inc., Carlos A. De La Paz and Glen Mertens for Plaintiffs and
Appellants.
Nemecek & Cole, Frank M. Nemecek, Mark Schaeffer and Jonathan M. Starre
for Defendants and Respondents.
_______________________________________
INTRODUCTION
Plaintiffs East Coast Foods, Inc. and its president and director, Herbert Hudson,
hired attorney John E. Kelly and his law firm, Kelly, Lowry & Kelley, LLP
(collectively, defendants) to represent them in a copyright-infringement lawsuit. The
fee agreement included a clause requiring the parties to arbitrate “any dispute”
regarding “any billing” or “the rendering by [defendants] of legal services[.]” After
losing in federal court, plaintiffs refused to pay defendants the remaining balance for
legal services. Instead, plaintiffs sued them for legal malpractice, and defendants filed
a cross-complaint for unpaid fees.
Plaintiffs appeal from the judgment entered against them after the trial court
granted defendants’ petition to confirm an arbitration award of $427,409.99 in unpaid
attorney fees, costs, and interest. Plaintiffs contend the arbitration provision in the
parties’ fee agreement was unenforceable because it was not adequately disclosed or
explained to them, and the trial court therefore erred in compelling them to arbitrate
their disputes. We disagree and affirm.
FACTUAL AND PROCEDURAL BACKGROUND
1. The Underlying Copyright Litigation and Defendants’
Legal Representation
Herbert Hudson is the director and president of East Coast Foods and assorted
other entities. Through these businesses, Hudson operates Roscoe’s House of
Chicken ’N Waffles, the well-known Southern California restaurant chain.
For many years, Edward Siegler has served as East Coast Foods’s general
counsel and Hudson’s personal attorney.1 Among other duties, Siegler supervises and
communicates with the outside law firms that plaintiffs hire to represent them in discrete
legal matters. In accordance with this practice, plaintiffs retained defendants to
represent them in a variety of legal matters from 1997 through 2012. During that time,
Siegler was defendants’ point of contact with plaintiffs. Defendants sent all case-related
1
Siegler is not a party to this appeal or the underlying lawsuit.
2
documents, communications, and billing statements to Siegler, and Siegler, in turn,
coordinated with Hudson.
The American Society of Composers, Authors and Publishers (ASCAP) is
a membership association that licenses and distributes royalties for non-dramatic public
performances of its members’ copyrighted works. On March 25, 2009, eight of its
members sued plaintiffs in federal court alleging that their copyrighted songs were
publicly performed at one of plaintiffs’ properties.2 The complaint asserted that
plaintiffs were liable for copyright infringement because they had failed to seek or
obtain a license from the artists or ASCAP before performing the copyrighted music.
Each artist sought statutory damages of between $750 and $30,000.3
Plaintiffs contend—and the legal bills reflect—that defendants began
representing them in the copyright case on or before April 8, 2009. On April 15, 2009,
Kelly spoke with Hudson and Siegler by phone. During the call, Kelly said he would
send Siegler a retainer agreement to review with Hudson. Later that day, Kelly sent
Siegler a follow-up letter. He wrote, “ ‘We appreciated the informative telephone chat
today with you and Herb Hudson. . . . Aaron and/or I should soon discuss with you
a fee arrangement for the clients in representing them in this civil action. . . . [We]
[l]ook forward to coordinating with you in implementing a defense in this case.’ ”
The following day, April 16, 2009, Kelly wrote to Siegler again. This time, he
included a proposed fee agreement. The cover letter explained, “Referring to our
communications over the past couple of weeks and our informative telephone
conversation Tuesday with Herb, we have generally agreed upon a relationship by
which our law firm will represent the two Defendants designated in the caption of the
2
Range Road Music, Inc., et al. v. East Coast Foods, Inc., et al.,
No. 09-CV-02059-CAS (AGR) (C.D.Cal. 2009) (copyright case).
3
ASCAP made several attempts to settle the matter without litigation. In 2007,
ASCAP offered to forego litigation if Roscoe’s would purchase a license to avoid future
infringements, and in 2008, ASCAP offered to settle the whole matter for $10,000.
Hudson apparently ignored these overtures.
3
above-identified litigation, i.e., Mr. Hudson and East Coast Foods, Inc. As you know,
under rules of the California Bar, attorneys are obligated to describe the basics of an
attorney-client and related business relationship and in that regard, I am sending directly
to you concurrently by email and regular mail, our proposed Engagement Agreement
with the clients.” After discussing matters relating to the litigation and defendants’ fees,
the letter emphasized, “Again, we are sending this letter and the proposed Engagement
Agreement with the clients, directly and only to you for review, comments—and assume
you will promptly coordinate with Herb. [¶] We invite your comments and are open to
proposed modifications—but as you certainly will know, this is a rather standard and
basic Engagement Agreement.” The letter closed, “We look forward to hearing from
you and Herb and working closely with you in defending this case. Should you desire
to join us as attorney of record, let me know.”
The enclosed fee agreement was dated April 16, 2009, and addressed to Hudson.
The agreement’s purpose was described as follows: “This letter sets forth our
agreement regarding retention of this firm by East Coast Foods, Inc. and you, in the
above-identified litigation and has been structured for signature by you as an officer of
East Coast Foods, Inc. and personally. Your company, East Coast Foods, Inc. and you
as an individual, are named as the Defendant in the [copyright case].” The agreement
was three pages long, and contained 11 numbered paragraphs. Paragraph seven
provided: “If any dispute arises between you and this firm with respect to any billing or
billings issued by this firm or the rendering by us of legal services, we both agree that
the dispute shall be submitted to mandatory binding arbitration. Such arbitration shall
be conducted in accordance with the rules of the State Bar of California, before a single
neutral arbitrator. The arbitration shall be conducted under the auspices of Judicial
Arbitrating and Mediation Service (JAMS) Los Angeles Office. JAMS shall appoint the
arbitrator upon written demand of any party to this letter agreement. The decision of the
arbitrator shall be final and binding on the parties hereto. The arbitrator shall have the
discretion to order that the costs of arbitration, including his or her fees, other costs, and
reasonable attorneys’ fees shall be borne by the losing party.” The agreement
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concluded, “Please feel free to contact me if you have questions or comments in regard
to this Engagement Agreement. We request at this time an initial retainer deposit of
$12,500.00. [¶] If the above terms are acceptable in all respects, then please sign this
letter or a copy of this letter on behalf of yourself and the corporations, and return an
executed copy to our office as soon as possible.”
Kelly followed up with Siegler by telephone the following day. Siegler
confirmed that he had received the proposed fee agreement and said it “ ‘looks OK.’ ”
Siegler told Kelly he would have Hudson sign it. Though Hudson eventually signed the
agreement, the timing and circumstances of his signature are unclear. Defendants
contend Hudson signed the agreement sometime in April 2009 in the presence of
Michael DiNardo, an attorney at the Kelly firm. However, the firm’s billing statements
do not indicate that DiNardo—or any of the other attorneys—met personally with
Hudson during that period, and Hudson did not recall signing the agreement. In any
event, the parties agree that by May 11, 2009, Hudson had signed the fee agreement and
returned it to defendants.
From 2009 through 2012, defendants vigorously defended plaintiffs in the
copyright case. After losing a motion for summary judgment in the federal district
court, plaintiffs appealed to the Ninth Circuit Court of Appeals, where they also lost.
Plaintiffs submitted a petition for rehearing en banc, which was denied. Finally,
plaintiffs filed a petition for certiorari with the United States Supreme Court. The
petition was denied.
By the end of the federal litigation, plaintiffs owed defendants $81,591.90 in
unpaid attorney’s fees. While plaintiffs had always paid their bills promptly in the past,
by October 2012, they had become unresponsive.
2. The Lawsuit and Motion to Compel Arbitration
On January 16, 2013, plaintiffs filed a complaint against defendants alleging
causes of action for legal malpractice, breach of fiduciary duty, and declaratory relief.
In essence, the complaint alleged defendants did not adequately research the law in the
copyright case, which resulted in a protracted trial and eventual ruling adverse to
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plaintiffs. The complaint sought compensatory damages of $970,000 for attorney’s fees
and costs expended in the underlying action, general and punitive damages according to
proof, and a declaration that the defendants’ services in the underlying action were
worthless.
On April 2, 2013, defendants answered the complaint and asserted the dispute
was subject to mandatory binding arbitration. They also filed a cross-complaint alleging
causes of action for breach of written contract, open book account, account stated, and
quantum meruit. The cross-complaint sought $82,446.90 in past-due payments for legal
services. On June 12, 2013, the trial court granted defendants’ motion to strike the
claim for attorney’s fees and punitive damages in the complaint, but denied their request
to strike the references to the Rules of Professional Conduct.
On October 3, 2013, defendants filed a motion to compel arbitration under the
fee agreement. They argued the fee agreement, which Hudson had signed in April 2009,
required the parties to arbitrate plaintiffs’ claims and defendants’ cross-claims.
Plaintiffs opposed the motion. Plaintiffs argued that the current malpractice claims were
not subject to the arbitration provision because defendants developed the deficient legal
theories in the copyright case in April 2009, a month before Hudson signed the fee
agreement, and those deficient theories are the basis for the current malpractice claims.
They also argued Hudson was unaware of the arbitration clause, the clause should be
construed not to apply to malpractice claims, and defendants did not fulfill their duty to
plaintiffs to explain the existence and nature of the arbitration clause.
On October 25, 2013, the court granted the motion to compel and stayed the
proceedings. The court concluded defendants had established the existence of “an
enforceable arbitration agreement between the parties which covers all of the disputes
alleged in the complaint and cross-complaint. Plaintiffs’ opposition is without merit and
plaintiff Hudson’s declaration lacks credibility. . . . [¶] Plaintiffs’ defense is now that
Hudson did not know what he was signing. Hudson declares that he is unsophisticated
in legal matters and depends on professionals for advice. Shockingly, Hudson fails to
advise the court that one of those professionals is attorney Siegler who was sent the
6
retainer agreement along with defendants’ invitation to discuss it further or to propose
modifications. Thereafter Siegler advised defendants that the agreement looked okay
and said he would have Hudson sign it. [¶] Based on all of the evidence submitted, the
court finds that plaintiff Hudson received the retainer agreement, reviewed it with
attorney Siegler, understood the terms of the agreement, including the arbitration
agreement, and signed the agreement signifying his acceptance of its terms.”
The parties proceeded to binding arbitration on all claims. After four days of
hearings, the arbitration award was filed on October 28, 2014. The arbitrator rendered
a decision in favor of defendants on both the complaint and the cross-complaint. She
awarded them $97,112.90 in damages, $279,995.50 in attorney’s fees, and $40,654.30 in
costs.
On November 12, 2014, defendants moved to confirm the arbitration award and
enter judgment in the trial court. Plaintiffs did not oppose the motion but reserved their
right to appeal the court’s earlier order granting the motion to compel. On January 15,
2015, the court confirmed the arbitration award and entered judgment for defendants.
Plaintiffs timely appealed.
CONTENTION
Plaintiffs contend the arbitration provision in the fee agreement is unenforceable
because it was not adequately disclosed or explained to them.
DISCUSSION
1. Applicable Law and Standard of Review
“The California Arbitration Act (Code Civ. Proc., § 1280 et seq.) compels the
enforcement of valid arbitration agreements. [Citations.] Section 1281 states:
‘A written agreement to submit to arbitration an existing controversy or a controversy
thereafter arising is valid, enforceable and irrevocable, save upon such grounds as exist
for the revocation of any contract.’ ‘The statutory scheme reflects a “strong public
policy in favor of arbitration as a speedy and relatively inexpensive means of dispute
resolution.” [Citation.]’ [Citation.]
7
“A party petitioning the court to compel arbitration [citation] bears the burden of
proving by a preponderance of evidence the existence of an arbitration agreement.
A party opposing the petition bears the burden of proving by a preponderance of
evidence any fact necessary to its defense. [Citation.] The trial court sits as the trier of
fact for purposes of ruling on the petition. [Citation.]” (Mt. Holyoke Homes, L.P. v.
Jeffer Mangels Butler & Mitchell, LLP (2013) 219 Cal.App.4th 1299, 1307-1308
(Mt. Holyoke).) If the court determines an agreement to arbitrate the controversy exists,
it must grant the petition to compel arbitration. (Code Civ. Proc., § 1281.2; Mendez v.
Mid-Wilshire Health Care Center (2013) 220 Cal.App.4th 534, 541.)
The fee agreement in this case was three pages long and contained 11 numbered
paragraphs. Paragraph seven provided: “If any dispute arises between you and this
firm with respect to any billing or billings issued by this firm or the rendering by us of
legal services, we both agree that the dispute shall be submitted to mandatory binding
arbitration.” This provision unambiguously encompasses all financial disputes between
the parties—and as we discuss below, plaintiffs have forfeited any argument that it does
not also apply to claims of professional negligence. Plaintiffs do not dispute that
Hudson signed the agreement on their behalf, and do not argue that the arbitration
“provision is inconspicuous or procedurally unconscionable in any way. Nor do they
argue that the provision is one-sided or substantively unconscionable. Instead, they
argue that Defendants had a duty to disclose and explain the significance of the
arbitration provision and the failure to satisfy such duty invalidates the arbitration
agreement. This is a claim of fraud in the execution, also known as fraud in the
inception.” (Mt. Holyoke, supra, 219 Cal.App.4th at p. 1308.)
“When a plaintiff alleges fraud in the inducement, the plaintiff is asserting that it
understood the contract it was signing, but that its consent to the contract was induced
by fraud. In contrast, when a plaintiff alleges fraud in the execution, the plaintiff is
asserting that it was deceived as to the very nature of contract execution, and did not
know what it was signing. A contract fraudulently induced is voidable; but a contract
fraudulently executed is void, because there never was an agreement.” (Brown v.
8
Wells Fargo Bank, N.A. (2008) 168 Cal.App.4th 938, 958 (Brown).) This issue often
arises when a plaintiff signs a contract without reading it. Because it is generally
unreasonable to fail to read a contract, if a plaintiff has “a reasonable opportunity to
discover the true terms of the contract” before signing it, the contract is not void due to
fraud. (Id. at p. 959.) However, “[i]f the defendant is in a fiduciary relationship with
the plaintiff which requires the defendant to explain the terms of a contract between
them, the plaintiff’s failure to read the contract would be reasonable.” (Ibid.) “In such
a situation, the defendant fiduciary’s failure to perform its duty would constitute
constructive fraud (citation), the plaintiff’s failure to read the contract would be
justifiable (citation), and constructive fraud in the execution would be established.”
(Ibid.; Mt. Holyoke, supra, 219 Cal.App.4th at p. 1308.)
The existence and scope of a fiduciary duty is a question of law that we review
de novo. (Castaneda v. Olsher (2007) 41 Cal.4th 1205, 1213.) However, “the factual
background against which we [answer that question] is a function of a particular case’s
procedural posture.” (Id. at p. 1214.) Thus, to the extent the court’s decision below
“turned on the resolution of conflicts in the evidence or on factual inferences to be
drawn from the evidence, we consider the evidence in the light most favorable to the
trial court’s ruling and review the trial court’s factual determinations under the
substantial evidence standard. [Citation.]” (Baker v. Osborne Development Corp.
(2008) 159 Cal.App.4th 884, 892.)
2. The court properly compelled arbitration.
As discussed, “[a] cardinal rule of contract law is that a party’s failure to read
a contract, or to carefully read a contract, before signing it is no defense to the contract’s
enforcement.” (Desert Outdoor Advertising v. Superior Court (2011) 196 Cal.App.4th
866, 872 (Desert Outdoor Advertising); accord, Madden v. Kaiser Foundation Hospitals
(1976) 17 Cal.3d 699, 710 [“one who assents to a contract is bound by its provisions
and cannot complain of unfamiliarity with the language of the instrument”].)
While this elementary principle of contract law is not vitiated because the
contract was for legal services, we are mindful that “ ‘[t]he relation between attorney
9
and client is a fiduciary relation of the very highest character, and binds the attorney to
most conscientious fidelity—uberrima fides.’ ” (1 Witkin, Cal. Procedure (5th ed. 2008)
Attorneys § 90, p. 125, quoting Cox v. Delmas (1893) 99 Cal. 104, 123.) In this case,
the parties had a long-established attorney-client relationship by the time Hudson signed
the fee agreement, which created fiduciary obligations and ethical responsibilities for
defendants toward plaintiffs. (See People ex rel. Dept. of Corporations v. SpeeDee Oil
Change Systems, Inc. (1999) 20 Cal.4th 1135, 1148.) However, absent exceptional
circumstances not present here, defendants had no duty to call attention to or explain the
terms of that agreement. (See Desert Outdoor Advertising, supra, 196 Cal.App.4th at
pp. 873–874; Ramirez v. Sturdevant (1994) 21 Cal.App.4th 904, 913 [“[I]n general, the
negotiation of a fee agreement is an arm’s-length transaction. [Citations.] [The lawyer]
accordingly was entitled to negotiate the terms on which he would accept employment
as he wished, and absent issues of duress, unconscionability, or the like, [the client] has
no cause to complain that the terms [the lawyer] negotiated were favorable to him.”];
see generally Fletcher v. Davis (2004) 33 Cal.4th 61, 70.) Thus, in the absence of
duress or fraud, “[a]n attorney may ethically, and without conflict of interest, include in
an initial retainer agreement with a client a provision requiring the arbitration of both
fee disputes and legal malpractice claims.” (Powers v. Dickson, Carlson & Campillo
(1997) 54 Cal.App.4th 1102, 1109 (Powers).)
Notwithstanding Desert Outdoor Advertising, Powers, and Mt. Holyoke—all of
which concern new fee agreements executed in preexisting attorney-client
relationships—plaintiffs argue that “[f]ee agreements made while the attorney-client
relationship exists are subject to the presumption of undue influence.” In support of this
proposition, plaintiffs cite to Gleason v. Klamer (1980) 103 Cal.App.3d 782, 787, a case
involving an account stated, not a fee agreement. As with other attorney-client
transactions involving ownership, possessory, or other pecuniary interests, “an account
stated is subject to a presumption of undue influence when entered between an attorney
and client during their fiduciary relationship.” (Id. at p. 787.) Plaintiffs’ other citations
also involve business transactions or property transfers between attorneys and their
10
clients. (See Trafton v. Youngblood (1968) 69 Cal.2d 17 [account stated]; Hawk v. State
Bar (1988) 45 Cal.3d 589, 601 [fee agreement in the form of a note secured by a deed of
trust on a client’s property requires attorney “to fully explain such transactions, to offer
only fair and reasonable terms, to give the client a copy of the agreement, and to give
the client an opportunity to seek independent legal advice[]” because it is reasonably
foreseeable the note may become detrimental to the client]; Rebmann v. Major (1970)
5 Cal.App.3d 684, 688 [attorney advised ill, elderly couple to deed property to
attorney’s children].)
Unlike attorney-client business transactions, the presumption of undue influence
does not typically apply to standard engagement agreements—even when they are
executed after the formation of the attorney-client relationship. (Walton v. Broglio
(1975) 52 Cal.App.3d 400, 404.) To the extent an attorney owes an existing client
a heightened duty when negotiating a new fee arrangement, he satisfies that duty by
assuring the agreement is fair and openly made, with the client’s full knowledge of its
terms and consequences, and of his legal rights. (Mt. Holyoke, supra, 219 Cal.App.4th
at pp. 1309–1310.) If the contract contains ambiguous provisions, those provisions will
be construed against the drafter/attorney. (Severson & Werson v. Bolinger (1991)
235 Cal.App.3d 1569, 1573.)4 The attorney does not, as plaintiffs suggest, have to
explain the agreement’s provisions personally. (See Mt. Holyoke, supra, at
pp. 1308-1310.)
Here, the arbitration provision was clear and conspicuous; it was not buried in
a lengthy or technical contract. The entire fee agreement was only three pages long and
the arbitration provision was set forth in a separate, succinct paragraph, in easily
readable type. Nor was Hudson required to sign the fee agreement when it was first
presented to him. To the contrary, he was invited to ask questions and negotiate the
agreement’s terms. And critically, at Hudson’s request, the agreement was sent to
4
Plaintiffs have forfeited any claim that the arbitration clause is ambiguous. (See
section 3, post.)
11
Siegler, plaintiffs’ long-time attorney. Defendants explicitly explained their expectation
that Siegler would discuss the agreement with Hudson. In short, there are no indicia of
surprise, duress, unconscionability, or any other similar grounds upon which plaintiffs
can successfully challenge the arbitration clause in this case. (Cf. Roman v. Superior
Court (2009) 172 Cal.App.4th 1462, 1470–1471 [discussing substantive
unconscionability].)
In any event, to the extent defendants had a fiduciary duty to explain the terms of
the agreement to Hudson, the trial court could reasonably infer from circumstantial
evidence that defendants satisfied their duty by having Siegler explain the agreement to
Hudson. As previously discussed, during an April 15, 2009 telephone call, Kelly,
Hudson, and Siegler discussed having Kelly send Siegler a retainer agreement to review
with Hudson. The following day, April 16, 2009, Kelly mailed Siegler the proposed fee
agreement. The cover letter to Siegler explained, “As you know, under rules of the
California Bar, attorneys are obligated to describe the basics of an attorney-client and
related business relationship and in that regard, I am sending directly to you
concurrently by email and regular mail, our proposed Engagement Agreement with the
clients.” After discussing matters relating to the litigation and defendants’ fees, the
letter emphasized, “Again, we are sending this letter and the proposed Engagement
Agreement with the clients, directly and only to you for review, comments—and assume
you will promptly coordinate with Herb.” The enclosed fee agreement was dated
April 16, 2009, and addressed to Hudson. Kelly followed up with Siegler by telephone
the following day. Siegler confirmed that he had received the proposed fee agreement
and said it “looks OK.” Siegler told Kelly he would have Hudson sign it. By May 11,
2009, Hudson had signed the agreement and returned it to defendants. This
circumstantial evidence supports the court’s finding that Siegler discussed the fee
agreement and the arbitration clause contained therein with Hudson before Hudson
signed and returned the agreement.
At oral argument, plaintiffs’ counsel emphasized that there was no direct
evidence before the trial court that Siegler ever discussed the fee agreement with
12
Hudson. To be sure, Hudson submitted a declaration opposing arbitration because he
did not recall any discussions with defendants about the arbitration clause. However, as
noted by the court, Hudson failed to mention Siegler in that declaration and, in any
event, the court concluded that Hudson’s declaration was unpersuasive; we defer to the
court’s credibility assessment on appeal. (Baker v. Osborne Development Corp., supra,
159 Cal.App.4th at p. 892.)
3. Plaintiffs have forfeited any argument that the arbitration agreement
did not encompass malpractice claims.
While arbitration is “an accepted and favored method of resolving disputes”
(Powers, supra, 54 Cal.App.4th at p. 1109), “ ‘there is no policy compelling persons to
accept arbitration of controversies which they have not agreed to arbitrate’ ” (Lawrence
v. Walzer & Gabrielson (1989) 207 Cal.App.3d 1501, 1505 (Lawrence)). Citing
Lawrence, plaintiffs argued below that the arbitration provision did not apply to claims
of legal malpractice and therefore failed this threshold test. (Id. at pp. 1506–1507.)
Although plaintiffs rely on Lawrence in their opening brief, they do not develop that
argument on appeal. Their failure to do so forfeits any appellate argument that the
arbitration provision was ambiguous or that it did not encompass claims of legal
malpractice. (Christoff v. Union Pacific Railroad Co. (2005) 134 Cal.App.4th 118, 125–
126.)
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DISPOSITION
The judgment is affirmed. Defendants to recover costs.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
LAVIN, J.
WE CONCUR:
EDMON, P. J.
*
HOGUE, J.
*
Judge of the Los Angeles Superior Court, assigned by the Chief Justice pursuant
to article VI, section 6 of the California Constitution.
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